Freight Market Stabilization Bolsters M&A Optimism

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As trucking mergers and acquisitions followed the freight market into a down cycle, conditions have stabilized, showing positive signs for the sector going forward.

The coronavirus pandemic brought with it a surge of freight activity alongside pressure to expand and diversify. This bolstered acquisitions, but as the freight market soured so too did that trend. Now with conditions steadying, there is renewed hope that activity will re-emerge later this year.

Jonathan Britva, managing director at Republic Partnersreferred to it as a “mixed bag.”

“It’s still a fairly muted market overall in terms of the activity. There’s certainly been a pickup in conversations for sure,” he said. “There’s interest out there from potential buyers that we are engaged on. We’ve got several deals in the market.”

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Britva added that the M&A sector is facing a gap between the sellers who are looking for more than what the buyers are willing to pay. He suspects that mismatch will continue until rates improve and performance remains consistent over time.

“I think sellers are becoming more realistic as to their values,” Britva said. “But I think a lot of folks are saying, ‘hey, I know it’s a tough time, but we can weather the storm and we know it’s going to bounce back.’ ”

Tenney Group CEO Spencer Tenney saw a spike in interest during the first quarter compared with the later half of last year. He noted that activity has been from both buyers and sellers entering conversations. Tenney Group also has four deals close to being under contract.

“The feedback we are getting is that many business owners that desire to exit in the second half, or just throughout 2023, just ­never felt comfortable with the environment,” Tenney said, adding that the freight market and interest rate environment appear to be stabilizing. “They’re just much more confident in their ability to get a deal done that’s economic- ally acceptable to them.”

Tenney also noted that there’s room for improvement before activity reaches a more normalized level. He expects full normalization to take place sometime in the third or fourth quarters, but he is encouraged by the number of buyers and sellers that are at the table.

“The motivations vary across the board, but one of the common themes is just offsetting rising operational costs, and that’s a major problem right now,” he said. “So, we’re seeing many buyers look to offset costs, and in the same motion diversify and attempt to create insulation from spot market exposure.”

Britva noted that there have been some deals pushed forward from carriers facing immediate business challenges. However, many have decided to wait until a market up cycle occurs to increase their valuation. He also has continued to see interest from strategic buyers who are more familiar with the industry and its cycles.

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“For the current market, it’s definitely a better scenario for a strategic buyer than it is for a financial buyer,” he said. “I think that probably continues until we see performance really start to bounce back where the private equity, the financial community, can start to tap the lender markets a little bit.”

Britva noted that many of these strategic buyers don’t need outside financing because they may have the necessary funding already through their existing debt or cash on hand. This limits how much they must rely on lenders.

Ken Kramerdirector of corporate banking at BMO Transportation Finance, expects the turnaround to be “a little stronger before there’s going to be a huge amount of uptick.”

“We’ve seen some transactions. But I would say it is still quite relative to where it was when the market was much stronger with the pandemic boost in place,” he said, adding that he suspects that the market is split between those who must sell their business out of need and those waiting for conditions to improve to bolster their valuations.

He noted there are plenty of people with money willing to buy on the recovery not having ­started yet. But currently, valuations don’t support that interest from the perspective of sellers.

“If there is an ability to identify that the market has turned and you have a little bit of traction to a recovery, then you’ll see the people who are more interested in selling because that’s what they want to do rather than what they have to do,” Kramer continued. “They’re going to be more willing to enter the market.”

M&A Expectations

Tenney is anticipating that the M&A rebound is going to have a few waves. He said he sees activity mostly concentrated on those that did not have a lot of freight market exposure, thus having a better position to transact when conditions began stabilizing.

“For those, over the past 12 months, whose businesses were materially affected, their ability and interest to get back into an M&A environment is going to take a little more time,” he said. “That’s why we expect multiple waves of sellers to begin the process of exiting.”

Tenney noted buyer interest has recently been more focused on brokerage and dedicated companies due to performance and stability. He also is seeing that occur with bulk carriers.

Gaurang Shastri, managing director at Lincoln International, said, “Generally speaking, there is this feeling that we may have turned the corner, although we may be turning that corner very slowly.”

Shastri added that the nature of these recent deals still fell in line with what occurred last year as they were smaller, tuck-in acquisitions. But he also noted more transformational deals such as TFI International acquiring Dasekeadding that strategic and private equity buyers feel there is a little bit more stability in the freight market.

“Which is, I think, what most investors were seeking before, really, becoming more aggressive. The good news continues to be that there’s still abundant capital out there,” he said. “The cost of capital is certainly higher, but there is a view that the cost of capital is also stable and, potentially, we may see a few rate cuts this year as well.”

Shastri stated that investors also have been looking for stability when it comes to freight rates. They aren’t necessarily looking for rates to shoot back up to where they were during the peak of the freight cycle, rather that they stay at a consistent level.

“There is a consensus view that we may have seen the bottom occur sometime late last year,” Shastri said. “And so far into this year, rates remain low, but they are relatively stable. The other part of the equation is capacity has slowly exited the market as well.”

Shastri summarized that there may be a balance between supply and demand, which ulti­mately leads to much more stability in terms of the overall market.

Kramer noted that buyers have been trying to normalize valuations since the end of the pandemic given how far the market swung from its peak to down cycle. He also has seen some realization on the part of sellers that they shouldn’t expect the high valuations from the pandemic era.

“I don’t think this will be ­driven by buyer demand. I think it’ll be a seller-driven process. Now financial buyers are always looking,” he said. “They’re always out there, they’ve all got money to spend. But there aren’t a ton of financial sponsors that like the asset-heavy trucking industry, and rightfully so.”

Kramer suspects that asset-light logistics transactions will start to turn around earlier, with the asset- heavy side likely trailing behind that and volume growth.

I feel like going through the pain of 2023 had (buyers and sellers) getting their heads in the right place, and more so from a seller perspective.

Billy Hart, managing partner at Bluejay Advisors

Billy Hart, managing partner at Bluejay Advisors, said that sellers are getting more realistic around valuation as the year progresses.

“They’re companies that went gangbusters in 2022 and fell off in ’23. It was difficult to get buyers and sellers to calibrate to what a fair valuation might look like,” he said. “I feel like going through the pain of 2023 had both sides getting their heads in the right place, and more so from a seller perspective.”

Hart added the freight markets have pretty much bottomed out and are starting to trend up. Because of that, investors are seeing opportunities to buy at the lower end of the market since they know carriers are likely not to fall much further. He also echoed the point about interest rates being reduced or at least remaining stable.

“They’re not effectively paying more for an asset they wouldn’t have otherwise in a lower interest rate market,” he said. “But I think where you’re going to see the most activity, at least early 2024, call it second quarter or third quarter, are mostly add-on acquisitions, as opposed to ­larger platform deals.”

Left Lane Associates President Peter Stefanovich has seen similar activity across North America. He noted that buyer sentiment picking up at the tail end of last year has led to an uptick in activity in 2024. There also is the expectation that interest rates will decrease before the summer, given signals from the Federal Reserve and Bank of Canada.

“That’s propelling people that have been sitting on the sidelines for 2023 to come back and say let’s talk and let’s start moving because things are going to get pretty busy,” Stefanovich said, predicting a busy second half of 2024 into 2025. “In 2023, there was a good amount of deal activity, but a lot of people decide to wait on the sidelines. So, I think a lot of people that were waiting are going to be jumping back in pretty soon, if they already aren’t in it.”

Stefanovich also noted that the freight market has become much more stable in that there aren’t likely to be the wild swings between the lower and high ends of the cycle. He suspects the up cycle this time around will be much slower and steadier. His data suggests the volatility margins are within 5% of what companies are doing right now instead of 20% to 40%.

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